Economics

Quantitative easing

Turning over a new leaf?

NORDIC and Germanic opposition to unconventional monetary policy is crumbling, so it seems. On March 25th, in interviews with Market News and the Wall Street Journal, two of the more hawkish members of the European Central Bank's governing council hinted that further monetary easing may be on the cards for the euro area. The euro obligingly sank on foreign-exchange markets.

First, Jens Weidmann, president of the German Bundesbank, told Market News that quantitative easing was no longer "out of the question", having previously ruled it out as a legitimate policy tool for the ECB. Then, Erkki Liikanen, Governor of the Bank of Finland, also seemed to open the door to this type of policy. He told the Wall Street Journal that, even with interest rates at record low levels, "we haven't exhausted our manoeuvering room" on monetary policy, and that "the question of negative deposit rates, in my mind, isn't any longer a controversial issue".

Other members of the ECB's governing council also seem to be more open to using a more unconventional range of policy tools. Jozef Makuch, the governor of the National Bank of Slovakia, said yesterday that quantitative easing was one option being considered, and said that there was growing support for reflationary policies: "Several policy makers are ready to adopt non-standard measures to prevent slipping into a deflationary environment."

Such a change in attitudes is probably due to three factors. First, the consensus views among Nordic and Germans economists has shifted over the last year or so. The mood at academic conferences has become less hostile towards unconventional monetary policies, and the fear of unintended consequences from quantitative easing is much reduced (although a few economists are growing more concerned about the effect of monetary stimulus on inequality).

But the shift also reflects rising worries in two other areas. More economists are fretting about the risks of getting stuck in a deflationary trap. Inflation in the euro area has been stuck at less than 1% since October; in February it fell to 0.7%.

Even worse, business confidence has been hit in central Europe by the Crimea crisis. On March 25th the latest results for the Ifo Institute for Economic Research's business-climate index suggested a sharp fall in economic confidence in Germany. The fear of a drop in demand in Europe's economic powerhouse has increased support for policies such as negative interest rates or quantitative easing being used to counteract the risk of a damaging slowdown.

However, launching unconventional monetary policies could still prove problematic. The German constitutional court ruled last month that the ECB’s bond rescue plan, Outright Monetary Transactions (OMT), is contrary to European law. And there has been little sign, as of yet, that German public opinion, or the attitudes of the government they recently elected, are becoming more favourable towards such a policy agenda. In short, there's still a long way to go before we see the ECB set QE free.

Compared to Europe, America is positively booming. Yet the European Central Bank, being bound by Northern European conservativeness, is much more complacent and inactive than the Fed.http://jku1.blogspot.com

{First, Jens Weidmann, president of the German Bundesbank, told Market News that quantitative easing was no longer "out of the question", having previously ruled it out as a legitimate policy tool for the ECB. Then, Erkki Liikanen, Governor of the Bank of Finland, also seemed to open the door to this type of policy.}

What? Have the Germans forgotten 1923 already? Or have they acknowledged that the hyperinflation was quite intentional, both as a way to destroy their domestic war debt and to pressure the Allies wrt reparations? That the Dawes Plan appeared in 1924 was not a coincidence.

Whe know whnat "unconventional monetary policies" do on long term. Check Japan in the last two decades.
Central Banks should not fight market forces. Let creative destruction do his work. Is better a short term pain than a large agonization.
Europe cannot afford to stall for another decade.

What wonderful reporting by the economist: “The change in attitudes is due to shifting views and less hostile moods.” Likewise, the change in moods is due to shifting views and attitudes, I’m sure. Thirdly, less hostile moods are a result of a change in attitudes and shifting views.

First of all, I think the main point of the article is *that* QE is more likely, rather than *why* the influential parties have changed their position.

Second, the article lists 3 reasons why QE is being viewed more positively: different attitudes at academic conferences, below-target inflation of the Euro, and a souring business climate.

Although its not explicitly stated, I imagine the reduced fear of QE at academics conferences has to do with the United States' implementation of QE without any inflationary spiral, i.e. the limited empirical evidence we have on QE refutes the primary criticism of QE.

Unconventional monetary policy? Quantitative easing is just open market operations, it's as conventional as monetary policy gets. You know what is not conventional monetary policy? Raising interest rates in the middle of a recession like the ECB did in 2011. I would agree that that kind of unconventional monetary policy increases inequality. The ECB couldn't have done more to increase income inequality if it tried, look at the 2011 increase income quintile share ratios for Spain, Italy, Greece and a number of other countries if you don't believe me:http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=ilc_di11&lang=en

You could say this was caused by austerity, but even then why would the ECB have the policy rate at 1 instead of 0 in the face of all that crippling austerity?

QE is massively misunderstood, characterized as "printing money", "inflating the money supply", etc. None of which are true in the context they are explained and there's strong reason to believe it doesn't work either (Japan being perhaps the best example).

The thing to recognize is there's not enough lending going on. Why isn't there enough lending going on? Two reasons a lack of demand for loans (particularly in the business sector) and a lack of credit worthy borrowers. No amount of bank reserves will help to solve these problems, in fact even increasing bank capital isn't likely to solve these issues (we can see this by the effects or lack thereof of high retained earnings among many of the banks).

Demand for loans is going to come from consumer demand, which eats up excess productive capacity within the system and forces and gives incentive for businesses to expand (the related problem is huge corporate cash reserves that mean they don't need to borrow). This in turn creates jobs and drives up wages, which improves the credit worthiness of borrowers.

When the economy is down this momentum takes time to build or requires injections of high powered money via government spending in areas that increases the productive capacity of the economy (infrastructure, etc.) We have somewhat of a new problem today, which is the disproportionate value and influence of knowledge workers on the economy relative to more manual labor jobs so this underlying challenge needs to be addressed to create sustainable change through much better educational policy and economic policy around education.

You evidently do. Here's the problem, people imply because of QE there is more money in the system. This is simply factually inaccurate. In fact most people couldn't tell you what it is from an accounting standpoint. In practice it's very simple, banks have assets on their balance sheets composed primarily of long term securities (typically government bonds for our purposes here) and cash. Normally, when they have excess cash (what we call "bank reserves") the Fed sells government bonds to drain the system of those reserves in order to hit the target overnight lending rate. QE is the process of swapping long term assets on the balance sheet for cash reserves. What's the net result? Has the net wealth or net financial assets on the bank's balance sheet increased? No, not a dime. Has more money been added to circulation? No, not a dime, it's still sitting on their balance sheet in the form of reserves (you can see this just looking at the reserve reports coming from the Fed banks, which have swelled dramatically). When people think "printing money", they think there's more money floating around in the system but that's not the case at all when it comes to QE. There are two times when more money is floating around in the system. The first and only time when the net financial assets of the system are increased is when the government engages in deficit spending. In these cases there is money created and added to circulation. The second case is when banks make loans, which involves inflating their balance sheets by creating corresponding assets (the outstanding loan) and liabilities (the bank account balance). Of the two only the former is an asset without a liability the later is net neutral in terms of net financial assets. Both of those cases legitimately increase the money supply. QE does neither of those things the balance sheets don't inflate their form simply changes. You can deny this all you want but these are accounting facts of what is actually occurring.

Politicians and economists can repeat the euphanism "Quantitative Easing" as often as they want, the result is the same.

Basically it is an effort through Government interferance to make everything (-anything to do with inflation or deflation of a given money - euro, dollar, yen) predictable.

What "The Economist" and it seems the rest of those on this bandwagon seem to ignore is history - government good intentions (meddling) such as QE has caused more problems than they have prevented. The big one recently was US Government meddling in the housing market.
It seems the Socialists at "The Economist" are eager to point thier finger at any cause (other than government) for problems in various countries - and it seems the only answer to these problems is control by government over everyone.
Odd how those economists who beleive in freedom of the markets, freedom of choice, and freedom from government never have a voice in this publication.

Not so sure it's 'odd' that staff at TE embrace activism/interventionism at every opportunity. It's a sort of 'if I ruled the world' belief that they have the answers to everything - though most of them have done nothing of note in a real-economy managerial or entrepreneurial capacity. (There is the one example of a guy who left to make his fortune, but that didn't work out so well - but he's back now, 0-for-1, which hasn't worked out so well either.)

Activism is so attractive, being possessed as it is of the self-endowed moral superiority inherent in 'do gooders' - its record of failure deserves to be overlooked. After all, one of these times they just might get it right, and so what if they don't - it's the lofty intentions that matter, not the results.

Anyway, contriving fanciful schemes to control other people and their money is much more interesting to write inconsequential articles about than is proposing that conservative policies and non-conflicted regulations will make things as good as they can sustainably be. Who wants to read that?

You're speaking as though these alternatives haven't been tried but we've seen all ends of the spectrum throughout history and enough of it to have a pretty good idea what works. In an economy needing to get on its feet (like Ukraine right now) a highly entrepreneurial base supported by a government playing the role of preventing others from interfering in market forces (preventing extortion, bribes, and other corruption that create risks for entrepreneurs outside of the basic market risks). As an economy grows it requires added forms of regulation to prevent large scale abuse, elimination of market forces due to monopolies, and reliability consumers can trust. One needs look no further than China and Singapore to see how government involvement can be highly effective. The problems comes in when government rather than regulating to prevent breakdowns in market forces and consistent standards for consumers instead introducing bureaucracy siphoning resources from the productive sectors of the economy into unproductive government programs.

We've already been over everything (allegedly) good about QE and everything certainly bad about it. So, lets look at 'negative interest rates' -

Charging folks interest on money they keep in their bank accounts - it sounds like a cool idea - provided it doesn't happen where I live, but for Europe - perfect. One shouldn't expect citizens to object (too much); after all, Europeans like to be told what to do, and are so accustomed to having their pockets picked that they seem to have learned to enjoy the experience. Not likely any of them will move their deposits abroad or start keeping their cash in safes, instead of vulnerable accounts - only wicked Anglo-Saxon devils do that kind of thing.

All that said, banks having 'excess reserves' deposited at the Fed should be charged at least CPI+7% per year on those reserve-deposits - and be prohibited from withdrawing them until all the principal is so consumed. Fraudulently acquired money should be confiscated.

Perhaps it would be more direct to instil a unit of account with a defined half life, and whatever doesn’t get spent within 2 years or so, will disappear! We could use plutonium from Israel’s Dimona reactor as money.

Negative rates already exist, in effect. Private bankers usually charge a % to manage one's funds, although one usually can try to peg that % to the proportion of time-weighted equity in the portfolio.

So it won't really hurt the wealthy.

But it will hurt the poor.

Piketty has shown that income from capital will usually trump income from labour. So to get the poor richer, we need to ensure they own more capital. And cutting their incentive to save is no way to do that.

Certainly true. On the other hand it's tough to save when you earn about what it costs you to live each month. To really make a difference not only does there have to be incentives and fiscal conservatism on the spending of the lower classes but they also need to earn more in order to have that money to save. There's only one logical conclusion I'm aware of when it comes to increasing the income of a population and that's increasing the value they can provide, which primarily relates to placing them in higher demand positions, which generally involves increasing their education/skill level. The catch here is at present education costs are skyrocketing to ridiculous proportions at a time when everything else information related (and education is mostly just information) is decreasing in cost. You've got an environment where people get behind to get ahead, they can't declare bankruptcy to wipe the slate clean, and there's more student loan debt than credit card debt.

So what's got to happen? Some ideas I think will work are:

1. Change the student loan funding system, don't offer student loans or don't offer as much to programs or degrees that don't result in an increase in income (for example all the young people taking psych and poly sci degrees getting out of school to discover McDonald's is still hiring shouldn't be receiving student loans for those degrees). At the same time don't make the money so cheap (Mark Cuban made a great observation about how we've essentially got the equivalent of the housing bubble in education, cheap money drives up the prices and doesn't force institutions to learn to provide their services cheaper)

2. Support policies that bring scalability and drive down costs in education (Khan Academy is a great example). Introducing metrics and accountability as well as incentives related to the performance metrics to the system would also be positive.

3. Provide readily accessible open real time data about the current market value of various degrees of experience, education, training, etc. to allow people to make informed market decisions, right now a young person, or heck anyway, doesn't have good real time data to inform them how they can increase their value in society (either by improving their education, enhancing their experience, moving to a new location, etc.)

4. Implement the Buffett plan to tax dividends and capital gains the same as working income to make the incentive to work. I don't like the idea of paying more tax on my dividends or capital gains but the reality is we should be incentivizing people to work not to not work

After all of the above maybe there are some policy decisions that can be made to help improve saving and investing practices.